11/05/2008 @ 3:10PM

Google Ditches Yahoo!

Jerry
Yang
Jerry Yang
, Yahoo!‘s
embattled chief executive, absorbed another body blow on Wednesday when
Google
announced it was pulling out of its advertising pact with the Web portal. In a statement, Google said it would have been too difficult to convince regulators that such a deal would not give the companies too much power in the online ad market.

In a statement Wednesday, Yahoo! said it is “disappointed that Google has elected to withdraw from the agreement rather than defend it in court. Google notified Yahoo! of its refusal to move forward with implementation of the agreement following indication from the Department of Justice that it would seek to block it, despite Yahoo!’s proposed revisions to address the DOJ’s concerns.”

Yahoo! tried to play down the deal, which was announced June 12, calling it “incremental to Yahoo!’s product roadmap,” but it could have generated $250 million to $450 million in operating cash flow during the first 12 months. In a letter to shareholders on June 25, Chairman Roy Bostock said: “The agreement is an important step in our efforts to capitalize on the high-growth online advertising opportunities.”

More importantly, however, the pact with Google helped Yahoo! soundly reject Microsoft‘s
takeover attempts. Last January, the software giant offered to pay $46 billion, or $31 per share, for Yahoo! in order to combine the companies’ advertising and digital media efforts. The offer was a 60% premium on Yahoo!’s shares at the time. After six months of back-and-forth negotiations and several rejections from Yahoo!, talks between the companies ended when Yahoo! forged the now-defunct ad pact with Google.

It’s been a costly strategy. Shares of Yahoo! have tumbled 50% since reaching a high of about $30 in July. Yesterday after the news, shares of Yahoo! were trading at about $14.26 in afternoon trading.

Investors–including Carl Icahn–are smarting from watching the value of the Internet portal melt. On Wednesday morning, someone anonymously circulated a memo to the blog, VentureBeat, claiming Yang would resign. A company spokesman said Yahoo! does not comment on rumors. But a survey of sources in the Valley suggested that the letter was a fake. Yang was also scheduled to speak at a San Francisco technology conference, Web 2.0, later on Wednesday afternoon.

What’s next?

Analysts on Wednesday said the door is open again for Microsoft to make another run at Yahoo!, obviously at a significantly reduced price. Microsoft’s stock price fell 86 cents in midday trading to $22.65.

Discussions between Yahoo! and
Time Warner
, which is still weighing what to do with AOL, may also be in the works. Time Warner released its earnings on Wednesday, reporting roughly flat revenue and net income compared with a year ago. Revenue for its AOL unit fell by about 17%. Time, Inc. has pledged to cut its workforce by 6%–about 600 jobs.